Tax Monitor

Refining Definitions of Owner-employees and Forgivable Occupancy Costs for PPP Loans

August 25, 2020

By: Mark A. Mangano

The Small Business Administration (SBA) continues to issue new rules defining forgivable costs under the Paycheck Protection Program (PPP). On August 24, 2020, the SBA issued interim final rule “Business Loan Program Temporary Changes; Paycheck Protection Program - Treatment of Owners and Forgiveness of Certain Nonpayroll Costs”¹ (IFR). The IFR answers three questions. The questions relate to the definition of owner-employees for applying limitations on payroll forgiveness, costs attributable to a tenant or subtenant of the PPP borrower, and limitations on rent paid to parties related to the PPP borrower.

Owners

The Paycheck Protection Program Flexibility Act significantly increased the maximum amount of forgivable payroll costs attributable to an individual employee from $15,385 to $46,154. However, to encourage borrowers to retain more employees, the SBA created the owner-employee compensation rule limiting the maximum amount of forgivable payroll costs for owner-employees to $20,833. The rule applied to all employees holding any ownership interest in the borrower.

The IFR modifies the prior rule by providing that an owner-employee in a C- or S-Corporation who has less than a 5 percent ownership stake will not be subject to the owner-employee compensation rule. The new rule is intended to exempt owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.

Tenants and sub-tenants

The IFR directs that non-payroll costs attributable to the business operations of a tenant or sub-tenant of the PPP borrower or, in the context of home-based businesses, household expenses are ineligible. The IFR addresses situations in which the PPP borrower’s operations only use a portion of a facility. The IFR provides four examples to illustrate the rule. The rule limits  forgivable occupancy costs such as interest on a mortgage, rent, and utilities to the portion of the costs attributable to the operations of the borrower.

Related party

The IFR provides that rent or lease payments by a PPP borrower to a related party qualify as forgivable costs as long as:

1. The amount of loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business, and
2. The lease and the mortgage were entered into prior to February 15, 2020.

A related party is defined as any ownership in common between the business and the property owner. The rule is intended to eliminate forgiveness advantages for business owners who have structured their businesses to hold real estate separate from the operating business. Despite the fact the SBA has been accepting forgiveness applications since August 10, 2020, the rules surrounding forgiveness applications continue to evolve. Both PPP borrowers and lenders should refer to the Treasury² website for up-to-date forgiveness requirements before submitting or processing a forgiveness application.

 

¹  https://home.treasury.gov/system/files/136/PPP--IFR--Treatment-Owners-Forgiveness-Certain-Nonpayroll-Costs.pdf
²  https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses